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Utilizing Glassdoor as an Investment Analysis Tool

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I wanted to delve deeper into why I see Glassdoor as such a valuable and increasingly important tool for Foolish long-term investors. This article, I hope, gives a clear explanation of why I am attempting to integrate Glassdoor into my various company analyses.

The short of it is this: research demonstrates that happier employees are more productive, employees feel more engaged in a values-based/purpose-driven culture, and happy and engaged employees result in lower employee turnover and longer-serving employees. Glassdoor is a great tool to begin gaining a better understanding of how successfully (or not) companies are serving their employees.

In our quest to find great long-term investments, Glassdoor is a tool that ought to be consulted before investing in a business. I wouldn't be surprised if the companies with the top CEO and workplace ratings on Glassdoor have been solid market outperformers over the past several years. Maybe that's a project for another day...

Glassdoor.com -- a website that allows employees to anonymously review their place of current or former employment -- is a tool commonly used by prospective job seekers. The insights Glassdoor offers into company cultures and leadership, however, are equally valuable for investors. Here are three reasons long-term investors should be paying close attention to company reviews on Glassdoor.

1. Happier employees are more productive

This may seem like common sense, but research really does back up this simple concept. A team of economists at the Warwick Business School conducted a study attempting to identify a link between an individual's happiness levels and productivity. "Happier workers, our research found, were 12% more productive," the researchers concluded. "Unhappier workers were 10% less productive." The report also suggested that "economists and other social scientists may need to pay more attention to emotional well-being as a causal force."

What causes employees to be happy? This is the question proactive businesses are attempting to answer. Glassdoor's marketplace of employee reviews helps employees reveal the positives and negatives of their respective workplaces. Investors should carefully review this employee feedback, which provides critical insights into the company cultures in which we may invest our hard-earned dollars.

2. Values engage employees

In its 2012 Global Workforce Study, Towers Watson surveyed more than 32,000 employees in 29 countries and found that only 35% of employees feel "highly engaged" with their respective place of work. 43% consider themselves "detached" or "disengaged" in the workplace. Tom Gardner, co-founder and CEO of The Motley Fool, and Morgan Housel put this into visual terms:

"Imagine a 10-person bicycle. This means that three people are pedaling, five are pretending to pedal, and two are jamming the brakes." Such is the state of the corporate world today. Glassdoor, however, gives us a glimpse into the company cultures that are bucking the trend and proactively developing workplaces that cultivate, engage, and retain top talent.

LinkedIn CEO Jeff Weiner -- ranked by employees as the best CEO in 2014 among companies with more than 1,000 employees -- explains that LinkedIn's success "starts with investing heavily in our culture and values and not just talking about it but walking the walk." Whether it be Weiner's bi-monthly company meetings with employees, free yoga classes for employees, or encouraging employees to pitch and develop new ideas, the company's employee rating of 4.5/5 on Glassdoor shows there is much other businesses can learn from LinkedIn's dynamic employee culture.

LinkedIn has also turned in stellar financial results, with total sales increasing an average of 58.4% annually since 2010. Since going public in 2011, the stock has increased more than 100%, handily beating the S&P 500's performance of 39% over the same period.

3. Employee retention

As you may be able to guess by now, the level of employee happiness and engagement in the workplace plays a major role in a company's ability (or lack thereof) to retain employees. In a 2012 survey from the American Psychological Association, employees most commonly cited reasons such as work-life fit and enjoying their work tasks as the top reasons to stay with their current employer. "For employees who said they plan to stay with their current employers for more than two years," the survey noted, "the biggest drivers of expected tenure were enjoying the work, having a job that fits well with other life demands, and feeling connected to the organization."

Entrepreneur and author Nilofer Merchant puts this concept in other terms: "Money motivates neither the best people nor the best in people. Purpose does." When it comes to retaining employees, purpose trumps monetary benefits.

Finding ways to retain employees is in the best interest of a business, considering employee turnover can become a major a drain on a company's financial bottom line and overall success. When a business loses an employee, it is losing the productivity, knowledge, and specialty of that individual. Dollars will have to be spent recruiting, interviewing, and training new employees. An organization's long-term viability should be called into question if its leadership does not recognize the importance (and financial sense) of attracting and retaining employee talent, particularly given today's growing workplace transparency thanks to services such as Glassdoor.

Costco Wholesale -- which enjoys a 3.8/5 rating on Glassdoor, while CEO Craig Jelinek is the #5-rated CEO in the country with a 95% employee approval rating -- serves as a prime example of the benefits of employee retention. Costco's average turnover in an employee's first year is 6% -- this number drops below 5% for employees who stay longer than one year -- compared to over 20% employee turnover for Wal-Mart. Over the past decade Costco has tripled for investors, crushing the S&P 500's returns by more than three times in the process.

Foolish bottom line

Glassdoor is still a fledgling service, but it already offers investors the opportunity to see what is really going on behind the scenes of our current and prospective investments. As Glassdoor grows beyond its current base of more than 3 million contributors and approximately 7 million unique monthly visitors, companies will be increasingly evaluated on their ability to please and retain top employee talent. Innovative company cultures will become the norm, not the exception.

Over time, top talent will likely gravitate to (and remain with) companies that offer the most rewarding and values-driven environments for employees. These innovative company cultures will more likely than not -- based on the research reviewed above -- lead to more productive and longer-serving employees. These are exactly the company cultures that Foolish long-term investors should seek out. Thanks to services like Glassdoor, this has never been easier.